Fed report: Credit tightens again, but not as rapidly

Credit card issuers toughen standards

If you are having trouble getting credit cards or using them to what you thought were their full extent, you're not alone and you'd better get used to it.

The people on the other side of the desk -- or, more likely, the Web connection or telephone line -- don't expect lending standards to ease for some time to come.

But they also offer this glimmer of light in an otherwise dreary credit environment: The consumer credit crisis apparently is beginning to stabilize, though at an uncomfortably taut level.

Credit again tightens, but not as severely

This chart shows that the percentage of lenders who have tightened credit has shot up rapidly in the recession that began in December 2007. Credit card issuers tighten credit by means such as reducing credit limits or requiring a higher credit score.

Those were among the conclusions of the Federal Reserve Board's latest survey of senior loan officers, released Aug. 17, based on responses from senior executives of 55 domestic banks and 23 U.S. branches and agencies of foreign banks.

The report came on a day when the stock market lost considerable ground, due largely to concerns that consumers still might not have sufficient confidence -- and credit -- to help lift the economy out of recession.

The Federal Reserve survey found that, despite the sprouts of improvement that are appearing here and there on the economic landscape, consumers still confronted considerable challenges when it came to credit card and other consumer loans during the second quarter of this year.

Not a single lender reported easing its standards for consumer credit cards or conventional mortgages. But at least things hadn't gotten appreciably worse during April, May and June.

"Banks have been reporting tightening for many quarters now, so it's natural to assume that at some point they cannot tighten any more," said economist Cristian deRitis, director of credit analytics for Moody's Economy.com in West Chester, Pa. "Also, the worst of the immediate credit crisis has subsided and banks have been able to raise some capital, so they can relax their defensive posture."

The report found that standards for credit card and other consumer loans remained dramatically tighter than they were a year ago. However, fewer banks stiffened their standards between April and June than during prior quarters.

Only 35 percent of the respondents reported tighter standards for credit card loans during the most recent quarter, compared to about 60 percent during each of the previous two quarters.

When it came to consumer loans other than those involving credit cards, 33 percent also reported tighter standards in that category, compared to 47 percent between January and March.

Card limits shrink
Oh, by the way. Have you noticed that, without any charge card spending change on your part, your total available credit seems to be evaporating?

It wasn't your imagination:

Substantiating anecdotal evidence, 49 percent of the lenders reported that they still are trimming the sizes of available credit lines for existing credit card customers. The same actions were being taken against other types of consumer and business loans. "Nevertheless," the report said, "these net percentages edged down for all categories of credit lines."

Banks have been reporting tightening for many quarters now, so it's natural to assume that at some point they cannot tighten any more.

-- Cristian deRitis
Moody's Economy.com

DeRitis was not surprised. He also has heard the stories and seen the data.

"In our own data, we have seen credit card balances decline and utilization rates increase, which is consistent with lower credit lines," he said.

Still, this phenomenon is not affecting everyone -- another reason to monitor your credit score and keep it as high as possible.

"I don't have hard data, but I would imagine there is a large divide in the distribution of credit line reductions," he said. "That is, low credit score borrowers are probably having lines reduced or closed much more aggressively than high score borrowers."

Expect credit to remain tight
As for the future ... don't ask.

A plurality of the lenders -- about one-third -- said they expect loan standards for prime credit cards borrowers to remain unusually tight for the foreseeable future, and about 25 percent of them didn't expect a return to normal until 2011.

As you would expect, the news is worse for nonprime credit card borrowers -- the industry term for people with spotty or bad records of repayment. Two-thirds of the lenders don't see a return to normalized standards for the foreseeable future.

"Credit conditions are likely to stay where they are until the unemployment situation turns around," deRitis said.

"Although the market has recovered substantially from where it was a year ago, banks still have tremendous volumes of bad assets to work through and won't have the risk appetite to lend to nonprime borrowers until they deal with their existing portfolios," he said.

Other findingsAmong the survey's other consumer-related findings:

The standards related to residential mortgages are beginning to stabilize to an even greater degree, with only 22 percent of the lenders saying they tightened standards between April and June, compared to about 50 percent during the previous quarter and about 75 percent about a year ago.

Similarly, about 30 percent of the domestic lenders said they further tightened standards for approving home equity lines of credit, compared to about 50 percent during the first quarter of 2009.

Only about 15 percent of the banks reported weaker demand for conventional mortgages or home equity lines of credit.

To a large extent, experts said, the report reflected the contradictory pressures still weighing on credit card issuers and other lenders.

Banks and other financial institutions are under pressure from the federal government to make more credit available to consumers and businesses, but they also are under federal pressure to tighten the lending practices that precipitated the economic crisis.

"The pressures are not coming just from the Feds," deRitis said. "Shareholders are also sending mixed signals as they see that there are some opportunities to lend but are also extremely risk averse."

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